C O N T E N T S Group financial highlights Summary Annual report Auditors' reports Accounting policies Financial statements

Transcription

1 CONTENTS Group financial highlights 4 Summary 5 Annual report Financial review 6 Market risks 9 Credit risks 11 Economic background 13 Business goals 14 Customers and activities 15 Organization and staff 17 Corporate governance 18 Management report 19 Auditors' reports 20 Accounting policies 21 Financial statements Profit and loss account 24 Balance sheet 25 Group structure 26 Cash flow statement 27 Financial ratios 28 Group financial highlights quarterly 29 Notes 30 Management, organization etc Shareholders Committee 51 Local shareholders' committees 53 Board of Directors and Executive Management 57 Organization 58 Stock exchange announcements 59 Annual General Meeting 60 Shareholders' meetings Branches 63 3

2 G R O U P F I N A N C I A L H I G H L I G H T S Profit and loss account (DKKm) Core income excl trading income 1,499 1,511 1,697 1,795 1,846 Trading income Total core income 1,804 1,941 2,236 2,246 2,361 Costs and depreciation 1,328 1,327 1,386 1,474 1,573 Provisions for bad and doubtful debts Core earnings Profit from investment portfolios Pre-tax profit on ordinary activities Tax Profit for the year Selected balance sheet items (DKKbn) Ordinary loans and advances Reverse repo loans and advances Deposits Bonds issued Subordinated capital (tier 2) Shareholders' equity (tier 1) Total assets Guarantees etc Financial ratios and key figures The Sydbank share (DKK per share) Profit for the year Dividend Share price at year-end Book value Share price/book value Sydbank Group Solvency ratio (total capital) (%) Core capital ratio (tier 1) (%) Pre-tax profit as % of average shareholders' equity Post-tax profit as % of average shareholders' equity Income/cost ratio (DKK) Number of full-time staff at year-end 1,907 1,905 1,916 1,897 1,945 Rating Moody s (long-term) A2 A2 A2 Moody s (short-term) P-1 P-1 P-1 Moody s (financial strength) C+ C+ C+ 4

3 SUMMARY Satisfactory pre-tax profit of DKK 609m In 2002 Sydbank generated a pre-tax profit of DKK 609m equalling a return on average shareholders' equity of 18% before tax. The merger with Egnsbank Fyn as from 1 January 2002 has been accounted for as an acquisition and affects Group figures in general by 2-3%. Comparative figures for prev ious years have not been restated. With a tax charge of DKK 195m the profit of DKK 414m is equal to a return of 12% on average shareholders' equity. The accounts fully live up to the expectations published during 2002 and are based on growing business activ i- ties characterized by increasing core income and moderately rising costs and provisions. In addition the profit from investment portfolios is highly satisfactory. Summary profit and loss account DKKm Core income excl trading income 1,795 1,846 Trading income Total core income 2,246 2,361 Costs and depreciation 1,474 1,573 Core income before provisions Provisions for bad and doubtful debts Core earnings Profit from investment portfolios Pre-tax profit Tax Profit for the year In 2002 the Bank has continued recent years' favourable developments in customer base and business activities. Group balance sheet highlights include: 4% rise in ordinary loans and advances to DKK 33.9bn 6% growth in deposits to DKK 33.4bn 14% increase in guarantees to DKK 8.6bn Despite the economic downturn the Group's credit ratios were strengthened further in Non-performing loans and advances amount to DKK 169m and total provisions constitute 812% of non-performing loans and advances against 718% at year-end Core earnings are expected to be maintained in

4 FINANCIAL REVIEW Core income excl trading income Total core income excl trading income rose by DKK 51m to DKK 1,846m. The chart below shows the developments compared to Development in core income excl trading income DKKm Interest margins etc 1,524 1,509 Mortgage credit Payment services Remortgaging and loan fees Other commission Other operating income Total 1,795 1,846 Interest margin income decreased by 1% compared to The growth in loans and advances and deposits has been unable to compensate for reduced income due to a receding interest margin. In 2002 income from steadily growing mortgage credit activities increased by 43% to DKK 73m and income from payment services went up by DKK 23m to DKK 66m. Remortgaging and loan fees grew by 12% to DKK 87m in contrast to other commission which declined by DKK 8m to DKK 76m. Other operating income went up by DKK 20m to DKK 35m of which DKK 13m can be ascribed to increased net profit on real property. Growing customer activities concerning bonds have compensated for reduced customer activities in relation to shares. Money market transaction developments and asset management growth have led to a trading income increase from DKK 451m in 2001 to DKK 515m in Core income Total core income amounts to DKK 2,361m compared to DKK 2,246m in Costs and depreciation Costs and depreciation recorded DKK 1,581m an increase of DKK 101m of which DKK 43m derives from Egnsbank Fyn. Moreover costs of DKK 24m have been generated by the establishment of Sydbank (Schweiz) AG whose target group is international investment clients. The subsidiary opened in St. Gallen (Switzerland) in February As in 2001 the level of costs reflects an expectation that the accounts will trigger employee shares resulting in a DKK 13m charge to the Bank. At year-end 2002 total staff numbered 1,945 (incl Egnsbank Fyn) compared to 1,897 one year ago. During the year 6 minor branches closed and a new branch opened in Skanderborg. Following the acquis i- tion of the 5 Egnsbank Fyn branches the number of branches totals 118. Trading income Trading income from bonds, shares, foreign currency and money market instruments comprises marketmaking and customer trading in the individual instruments as well as profit/loss from the related trading portfolios. Asset management income covers commission and fees from investment funds, por tfolio management agreements and the Bank's pooled schemes and custody fees. Development in trading income DKKm Bonds Shares Foreign currency Money market Asset management Total Costs and depreciation DKKm Staff costs Other administrative expenses Depreciation and write-downs of tangible assets Other operating expenses 1 3 Total 1,480 1,581 Of which concerns profit from investment portfolios 6 8 Provisions for bad and doubtful debts The charge for bad and doubtful debts totals DKK 299m, ie an increase of DKK 39m compared to Provisions for bad and doubtful debts represent 0.7% (2001: 0.6%) of ordinary loans and advances, guarantees and provisions. 6

5 Group provisions for ordinary loans and advances and guarantees made up DKK 1,372m at year-end (2001: DKK 1,258m), ie 3.1% (2001: 3.0%) of ordinary loans and advances, guarantees and prov isions. Nonperforming ordinary loans and advances total DKK 169m (2001: DKK 175m), unchanged at 0.4%. A-provisions make up DKK 1,272m (2001: DKK 1,154m), equal to 2.9% (2001: 2.8%) of total ordinary loans and advances, guarantees and provisions. Total provisions account for 812% of non-performing loans and advances (2001: 718%). Core earnings Core earnings total DKK 489m, ie a decrease of DKK 23m compared with Profit from investment portfolios In 2002 profit from investment portfolios amounts to DKK 120m (2001: DKK 99m) less funding charges, and less related costs of DKK 8m. Two main contributing factors in this respect are a fall in interest rates during the period and a DKK 15m return on own shares. Profit for the year Pre-tax profit amounts to DKK 609m, ie largely unchanged compared to DKK 611m in The tax charge represents DKK 195m (2001: DKK 156m). The year's profit of DKK 414m is equal to a return on average shareholders' equity of 12% (2001: 14%). Subsidiary undertakings The subsidiary undertakings, DMK-Holding and SBK- Invest, contribute a pre-tax profit of DKK 40m (2001: DKK 38m). The main activities of DMK-Holding and SBK-Invest are lending by way of leasing and factoring, and company administration. The lending portfolio of these undertakings has gone up by DKK 233m and totals DKK 1,697m at year-end The pre-tax profit of Investerings-Compagniet Odin A/S represents DKK 4m. Ejendomsselskabet posted a pretax profit of DKK 1m (2001: loss of DKK 6m). As a result of establishment costs etc the newly formed subsidiary, Sydbank (Schweiz) AG, recorded a pre-tax loss of DKK 24m. All subsidiary undertaking results are included in core earnings. Balance sheet At 31 December 2002 the Group's total assets amount to DKK 66.8bn largely unchanged compared to The Group's overall level of activity has been high. Assets Year-end DKKbn Amounts owed by credit institutions etc Ordinary loans and advances Reverse repo loans and advances Securities and holdings in associated and group undertakings etc Other assets Total Ordinary loans and advances account for DKK 33.9bn, equal to a 4% increase. Reverse repo loans and advances make up DKK 4.7bn (2001: DKK 4.6bn). Securities and holdings portfolios total DKK 17.6bn (2001: DKK 19.2bn) consisting of pooled schemes of DKK 3.6bn (2001: DKK 3.8bn) and the Bank's other portfolio including own shares of DKK 14bn (shares and holdings of DKK 0.6bn; bonds of DKK 13.4bn). The property portfolio accounts for DKK 844m (2001: DKK 820m). Liabilities Year-end DKKbn Amounts owed to credit institutions Deposits Bonds issued Other liabilities Subordinated capital (tier 2) Shareholders' equity (tier 1) Total Deposits make up DKK 33.4bn against DKK 31.6bn at year-end This 6% increase can be attributed to on demand deposits and notice deposits. 7

6 Capital resources Subordinated capital (tier 2) totals DKK 1,353m at yearend 2002 (2001: DKK 1,215m). In the last six months of 2002, EUR 40m in supplementary capital was raised under the Global MTN Programme. In the course of the year supplementary capital amounting to DKK 150m has been repaid. As of 1 April 2003 EUR 100m in supplementary capital will be repaid. Refinancing activities have been implemented. Shareholders' equity (tier 1) was DKK 3,435m at yearend As from 1 January 2002 shareholders' equity (tier 1) was reduced by DKK 157m covering goodwill etc as a result of the merger with Egnsbank Fyn to DKK 3,278m. At year-end 2002 shareholders' equity (tier 1) stands at DKK 3,577m, representing an increase of DKK 299m after allocation of DKK 113m of the year's profit for dividends and DKK 2m for the Group's sponsorship fund, "Sydbank Sønderjyllands Fond". Effective from 1 January 2003 the Executive Order on Bank Accounts was amended according to which unlisted securities must be included at fair value as opposed to cost value, which has so far been the rule. This accounting policy amendment means that shar e- holders' equity (tier 1) was adjusted up by DKK 238m, bringing total shareholders' equity (tier 1) to DKK 3,815m. Solvency Year-end DKKbn Jan 2003 Core capital (tier 1) after deductions Capital base (tiers 1+2) after deductions Off-balance sheet items Guarantees rose by 14% to DKK 8.6bn (2001: DKK 7.5bn) of which mortgage credit guarantees constitute DKK 6.0bn (2001: DKK 5.3bn). Other commitments mainly irrevocable credit commitments have been reduced by DKK 338m to DKK 146m. Proposals to the AGM for the allocation of profit The following motions will be put before the AGM: that an unchanged dividend of DKK 15 per share be distributed for 2002 that an amount of DKK 2m be distributed to the sponsorship fund, "Sydbank Sønderjyllands Fond". Outlook for 2003 The Bank's 2003 budget is based on expectations of weak Danish economic growth. Consequently loans and advances are budgeted at modest growth and provisions at the 2002 level, ie equal to % of total ordinary loans and advances, guarantees and prov isions. Moderate growth in total core income is expected. Sydbank budgets for a cost increase of around 2-3% in Budget costs are based on a number of factors, including a full-time staff decrease of approx 15 in 2003 and the decision to set up a branch in Holstebro. Overall the Bank expects to be able to maintain a level of core earnings of DKK m in Weighted items outside trading portfolio Weighted items with market risk Total weighted items Solvency ratio (total capital) Core capital ratio (tier 1) At year-end the Group's solvency ratio (total capital) amounted to 11.4% (2001: 10.4%) and the core capital ratio (tier 1) was 8.3% (2001: 7.8%). As from 1 January 2003 Group solvency ratio (total capital) is 11.8% and core capital ratio (tier 1) 8.8%. 8

7 MARKET RISKS Overall Group market risks are stated as total risk in terms of interest rates, currencies and shares. Assuming market risks forms part of the Bank s core business and is of great importance to total earnings. The Bank s Treasury Division manages market risks while observing the policies and limits determined and adopted by the Bank s Board of Directors. Market risks associated with trading and customer portfolios are managed by Sydbank Markets. The Bank s Controllers continuously monitor the individual risk areas and provide the Bank's Board of Directors and Executive Management with ongoing and extensive reporting. Interest rate risk Interest rate risk comprises total Group risk of loss resulting from interest rate fluctuations in the financial markets. Sydbank adopts a cash flow model to assess the interest rate risk of fixed rate positions (bonds etc), cf Note 37, and the Bank s own duration model calculates the interest rate risk of Danish callable mortgage bonds. Interest rate risk makes up the bulk of total Group market risks. Interest rate risk by duration and currency DKKm 0-1 year 1-2 years 2-3 years > 3 years Total 2002 Foreign exchange risk In 2002 the Group s total foreign exchange risk was very modest similar to previous years. At year-end the calculated risk of the open foreign exchange pos i- tion stood at DKK 3.6m (2001: DKK 1.8m), an unchanged 0.1% of core capital (tier 1) less deductions. Total 2001 DKK EUR (2) (11) (72) USD 1 8 (2) CHF SEK (1) NOK 2 (1) Other (1) 10 (8) (1) 0 (8) Total Total Share risk The Group s investment portfolio of listed shares, ie excl portfolios of pooled schemes and own shares, totals DKK 111m at year-end 2002 (2001: DKK 224m). The portfolio of unlisted shares, stated at the lower of cost or book value, accounts for DKK 240m at year-end 2002 (2001: DKK 175m). In accordance with the Danish Financial Supervisory Authority s Ratio System, interest rate risk is calculated as the risk of a parallel shift in the interest rate level of 1 percentage point in all currencies and totals DKK 208m or 5.9% at year-end (2001: 4.2%) of Group core capital (tier 1) after deductions. A calculated loss of DKK 181m (2001: DKK 200m) derives from positions in Danish kroner and a calculated net loss of DKK 27m (2001: a calculated gain of DKK 63m) from foreign exchange positions. At year-end 2002 the portfolio of holdings in associated undertakings and other significant holdings totals DKK 195m (2001: DKK 282m). 9

8 Financial instruments The Bank's customers and the Bank alike use derivative financial instruments to hedge and manage market risks. Sydbank is an active trader in derivative financial instruments. Note 7 illustrates the extent of unsettled transactions at year-ends 2001 and Derivative financial instruments are included in the calculation of the Group s market risks according to the underlying risk type. Consequently derivative financial instruments do not entail further independent market risks to the Group. Breakdown of derivative financial instruments at yearends 2001 and 2002: Liquidity risk Measured as the difference between loans and advances and deposits/bonds issued, the Group reduced its total deposit deficit by DKK 0.5bn in A EUR 1bn Global MTN Programme forms part of the Bank s cash resources. In 2002 this Programme was used to raise supplementary capital amounting to EUR 40m. The Bank's untapped cash resources under the Global MTN Programme represent just below EUR 600m. Measured in relation to the 10% requirement as specified in section 28 of the Danish Banking Act, the Bank s liquidity for appear from the chart below. Derivative financial instruments Year-end DKKm nominal amounts Currency con tracts Forwards/futures 108,118 67,913 Swaps Options 7,989 7,140 Interest rate contracts Forwards/futures 7,349 36,208 Forward Rate Agreements 178, ,668 Swaps 124, , Mar Jun Sep Dec Mar Jun Sep Dec Liquidity Options 16,377 14,466 Equity contracts Forwards/futures 14 8 Options

9 CREDIT RISKS Credit risks arise when an exposure is deemed not recoverable due to a debtor's lack of will or ability to repay at the agreed time. Exposures comprise loans and advances (ordinary and reverse repo), guarantees and amounts owed by credit institutions. Moreover credit risks may arise from trading in securities, foreign currency and derivative financial instruments. Total credit risks are managed according to policies and limits as determined and adopted by the Bank's Board of Directors and Executive Manage ment. The Bank's Credits Division is centrally responsible for monitoring, overall risk-taking and reporting to the Bank's Board of Directors and Executive Management. Write-offs If a customer's ability to pay ceases the exposure will be written off. If there is no doubt that part of an exposure will be lost the exposure will be partly written off. Distribution by industry/diversification The Bank aims to ensure a credit portfolio in conformity with sector averages in terms of retail/corporate distribution and industry distribution. The Bank's total loans and advances and guarantees are broken down as follows: corporate clients 58%; retail customers 30%; the public sector 2%; and corporate reverse repo transactions 10%. Once a year all corporate client exposures beyond DKK 1m are evaluated, classified according to risk and approved. Critical exposures If the creditworthiness of a customer is questioned and his lack of will or ability to pay is deemed uncertain, the exposure will be classified as critical, monitoring will be intensified and the need for making provisions will be assessed. Provisions In addition to individual provisions the Bank adjusts total provisions annually on the basis of statistical calc ulations of the expected risk of loss. Individual provisions are made if an exposure is deemed to entail a loss due to a customer's present and expected financial situation compared with the realization value of any potential security provided. The need for making provisions is assessed on an ongoing basis and provisions are increased or reduced to the extent dictated by changes in a customer's financial situation. Bank loans and advances and guarantees by industry Ordinary loans and advances and guarantees: DKKm % DKKm % Agriculture etc 2, ,963 6 Fisheries Manufacturing 2, ,159 7 Building and construction 1, ,270 3 Trade, hotels and restaurants 4, , Transportation etc 2, ,580 3 Finance, insurance etc 4, , Property administration, purchase and sale of property, and various services 4, , Other corporate lending 4, ,196 2 Total corporate lending and guarantees 26, , Public sector Retail customers 12, , Total ordinary loans and advances and guarantees 40, , Reverse repo transactions (corporate): Finance, insurance etc 4, , Total 45, , Provisions are divided into A-provisions, indicating a probable risk of loss, and B-provisions, indicating an unavoidable loss. 11

10 Bank loans and advances and guarantees by size Exposures Number % DKKm % Number % DKKm % Below DKK 1m 80, , , , DKKm , , , , DKKm , , DKK 100m and above , , Total 85, , , , As accounted for under section 23 of the Danish Banking Act, total exposures exceeding 10% of the capital base (tiers 1+2) represent 70% the Act stipulates a limit of 800%. Provisions for bad and doubtful debts The Group' provisions in 2001 and 2002: The chart below shows the development in Group pr ovisions for ordinary loans and advances and guarantees as well as non-performing ordinary loans and advances from 2001 to Furthermore provisions as well as non-performing ordinary loans and advances as a percentage of ordinary loans and advances, guarantees and provisions are represented. Group provisions for bad and doubtful debts DKKm The year's net increase in provisions Directly written off without previous provisions Recovered from debt previously written off (42) (48) Charge to profit and loss account The charge to the Group's profit and loss account rose by 15% from 2001 to Group provisions DKKm Provisions for ordinary loans and advances and guarantees 1,258 1,372 Non-performing ordinary loans and advances Provisions for ordinary loans and advances and guarantees less nonperforming ordinary loans and advances As % of ordinary loans and advances, guarantees and provisions: 1,083 1,203 Provisions Non-performing ordinary loans and advances Group loans and advances and guarantees DKKm Chan ge % Ordinary loans and advances 32,768 33,866 3 Reverse repo loans and advances 4,560 4,702 3 Guarantees 7,521 8, Provisions 1,258 1,372 9 Loans/advances, guarantees and provisions 46,107 48,492 5 Of which ordinary loans and advances, guarantees and provisions 41,547 43,790 5 A-provisions make up DKK 1,272m (2001: DKK 1,154m), ie 2.9% (2001: 2.8%) of ordinary loans and advances, guarantees and provisions. Total provisions account for 812% of non-performing loans and advances (2001: 718%). Legal risks Sydbank is party to a number of legal actions. The actions are under continuous assessment and the necessary provisions are made on the basis of loss risk. 12

11 ECONOMIC BACKGROUND Danish economic growth was around 1.5% in 2002 all in all virtually unchanged compared to However the composition of growth altered significantly as private consumption was the major growth engine. Not unexpectedly, low economic growth led to rising unemployment. Modest economic activity did not how - ever warrant declining inflation. Increased oil prices in particular pushed up inflation bringing it to fluctuate around 2.4% during the year. Despite increasing unemployment and relatively high inflation the Danish economy is generally in quite good shape as illustrated by solid current account and public finance surpluses. Due to expectations that a global economic recovery was well under way the 10-y Danish government bond yield picked up at the beginning of 2002 and peaked at 5.5%. A number of weak indicators released in the early summer and onwards reversed interest rate developments, and long-term rates ended the year at approximately 4.5%. Based on expectations of unchanged rather low euro area economic activity at the beginning of 2003, Sydbank projects that long-term interest rates will continue to be low at around 4.25% in 1H. Subsequently the emerging upswing is forecast to push up interest rates to approximately 4.75% towards the end of the year. In the opinion of the Bank there are no prospects of any major crisis in the Danish economy. It is forecast that continued real earnings increases and very low interest rates will generate growth of approximately 2% in pr i- vate consumption also in However the economic upturn is not likely to happen in the near future since global ec onomic growth is too low for that. Modest growth in the global economy will also affect Denmark with 2003 GDP growth forecast to remain at around 1.5%. Slightly increasing unemployment is expected in 1H after which the level may well stabilize around 6%. Inflation is projected to be reduced during the year to an average of around 2% compared to 2.4% in Unchanged solid albeit slightly lower current account and public finance surpluses are anticipated Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 10-y yield 2002 % p.a. 10-y govt bond Moreover short-term rates dropped during The 3- m rate declined from approximately 3.5% at the beginning of the year to approximately 2.9% at year-end. The main reason is that Danmarks Nationalbank followed the ECB interest rate cut of 0.50 percentage points in December and moreover it independently lowered its lending rate by an additional 0.15 percentage points during the year to counter a further DKK pick-up. At the beginning of 2003 an ECB interest rate cut is expected which will bring short-term rates to its lowest level in many years y yield 2002 Jan % p.a. 10-y govt bond Feb Mar Apr May Jun Jul For the third consecutive year, 2002 saw large share price declines. KFX dropped by approx 25% which was however less than the share indices of several other countries. Apart from disappointing growth developments, large accounting scandals in the USA and uncertainty surrounding the situation in Iraq have been the most important causes for sagging share prices. Sydbank anticipates that the emerging global economic upturn as well as a settlement of the Iraqi conflict will regenerate share prices in 2003 bringing KFX to around at the end of the year. Aug Sep Oct Nov Dec KFX

12 BUSINESS GOALS Values and profile Sydbank is and will continue to be an independent Danish all-round bank deeply rooted in terms of customers and shareholders for the benefit of all our stakeholders: customers, local communities, shar e- holders and staff. The Bank aims to fulfil customer needs in a competent, reliable, obliging and competitive manner. Sydbank's organizational philosophy is based on the needs and requirements of customers and business activities, and on broad delegation of professional competence and decision-making responsibility to individual customer oriented units. At the same time efforts are made to streamline administration. Consequently knowledgeable, committed, flexible and productive employees are the Bank's most valuable resource and competitive parameter. Financial goals The Bank's continued aim is to be a money-making and sound institution. Supported by the Bank's values and profile, Sydbank's financial goal is to achieve over time results and ROE to the satisfaction of shareholders' long-term return expectations and exceeding the average of Danish banking peers. Sydbank aims to maintain a solvency ratio (total capital) around 10% and a core capital ratio (tier 1) around 8%. Sydbank is the fourth largest bank in Denmark. The Bank's geographical core areas are the counties of Sønderjylland, Ribe and Vejle, in addition to Aarhus and Odense and the South of Funen. Sydbank is moreover represented in major Danish cities in Central and North Jutland, Copenhagen as well as in Northern Germany and since 3 February 2003 now also in St. Gallen in Switzerland. The Bank combines the small bank's qualities clos e- ness, local knowledge, flexibility and involvement in relation to the many customers with the large bank's potential for providing specialized and value creating banking services efficiently and profitably to eg corporate clients and investment customers. Sydbank offers personal service in a significant branch network and an increasing range of e-banking selfservice solutions to both corporate clients and retail customers. The Bank's service concept aims to optimize the utility value of the individual customer-bank relationship so that it reflects mutual profitability and loyalty. 14

13 CUSTOMERS AND ACTIVITIES Customers and branches Sydbank has approximately 330,000 customers including just over 20,000 corporate clients. The number of customers is growing over the past 5 years by roughly 10%. This trend is highly satisfactory also considering the Bank's general focus on total banking relationships and mutual profitability and loyalty between customer and bank. Furthermore this trend demonstrates Sydbank's ability to attract and retain customers in a highly competitive industry. The Bank has a total of 114 branches in Denmark, 2 in Flensburg, 1 in Hamburg and the special branches, Private Banking International (PBI) in Gråsten and St. Gallen, Switzerland. The PBI branches offer investment and asset management to non-danish customers. Following the successful opening of a branch in Silkeborg in late summer 2001, Sydbank opened a branch in Skanderborg in April 2002 which has also got off to a good start and is expected to break even during In addition a new branch in Holstebro will open in mid In May 2002 Sydbank merged with Egnsbank Fyn and instantly gained a considerable market share of retail customers and corporate clients in the Odense area. Today the Odense region comprises 6 branches in prime locations. During the year Sydbank closed down 6 minor branches and adjusted the opening and service hours of 2. Within its geographical core areas the Bank aims to maintain a wide branch network which allows naturally in a cost-effective fashion continued presence even in small towns. Self-service Using the Bank's comprehensive corporate websites and self-service solutions, Sydbank's customers are able, from home, to obtain valuable, financial information, prepare a financial background for decisions in different areas, as well as carry out ordinary banking transactions including securities trading. In 2002 Sydbank launched a Sydfactoring website and a special youth site as part of the Bank's new, attractive youth concept "U concept" tailored to young people undergoing education or training. Sydbank's NetBank for retail customers has just over 50,000 subscribers. During 2003 NetBank will be converted into a dynamic portal allowing all subscribers to customize NetBank contents and layout. In 2002 more than 1,200 new businesses signed up for Sydbank's corporate client Online Banking systems, bringing the total number of corporate client subscribers to just over 7,000. The systems are continuously expanded both in terms of functionality and technology. Sydbank has issued 150,000 Dankort cards (national debit card) to customers, including 80,000 with the international VISA facility and around 15,000 with the extra credit facility offered by Sydbank's BlueCard. The Danish card market, dominated by the Dankort card is in a state of change and Sydbank plans to introduce new exciting offers in Sydbank has a total of 140 ATMs of which 110 are placed outdoors and open for cash withdrawals virtually round the clock. In 2002 they handled just over 4m cash withdrawals equal to around 67% of all cash withdrawals made in or through the Bank. During 2003 ATMs will be installed in all Sydbank branches. Business areas Sydbank's product range and supply channels are competitive and fulfil customer needs and requir e- ments. In its activities Sydbank attaches importance to providing professional advice, to being a forwardlooking sparring partner and to providing smooth and efficient service of retail customers, corporate clients, and investment customers. This is based on the Bank's knowledge of customer needs and requirements and on staff specialist knowledge within the different areas of expertise, including finance/mortgage credit and pension savings. Sydbank's business strategy focuses on producing its own banking products and services. In addition the Bank has concluded a number of cooperation agree - ments with subsuppliers from outside the classic bank product range eg in connection with insurance, mortgage credit and investment fund products. Sydbank's primary mortgage credit partners are Totalkredit and DLR (the Agricultural Mortgage Bank) and its insurance partners are Topdanmark and PFA. 15

14 Investments Investment advisory services and asset management are among Sydbank's particular fields of competence and for a number of years they have been among the Bank's most significant business growth areas. Sydbank's customer oriented expertise within inves t- ment advisory services and asset management is available in 16 local investment centres and depar t- ments, supported by Sydbank Markets which delivers and develops products, tools and systems. Consequently Sydbank is in a strong position to respond to investment customer demand. Working closely with the investment funds, Sydinvest and BankInvest, Sydbank manages securities deposits totalling DKK 20.2bn at year-end Corporate clients Sydbank is and will continue to be a competitive allround bank for our corporate clients. Sydbank has special competence when eg corporate clients request efficient payment service and cash management solutions nationally as well as internationally. This is emphasized not only by Sydbank's branches in Germany, but also by the Bank's participation in the newest cross-border euro payment systems and in Connector. In addition to being a supplement to other payment ser vice solutions, Sydbank can provide international cash management solutions in more than 20 countries. Another particular field of competence is the hedging of customers' interest rate and currency risks. The Bank offers interest rate hedging of short-term as well as long-term credits and a wide range of instruments, including ordinary forward contracts and structured option products, to hedge currency risks. Moreover corporate clients are provided with professional ebanking solutions also within special areas such as foreign exchange trading and documentary credit transactions. In 2002 Sydbank took part again in a poll on corporate clients' primary banker satisfaction. According to the poll Sydbank has the most satisfied and loyal corporate clients in Denmark, the Bank has a low rate of corporate clients who plan to change bankers and within the Bank's geographical core area Sydbank is designated most frequently as the financial institution pr e- ferred by businesses in the event of a change. In 2003 Sydbank will increase its focus on corporate clients. The Sydbank share At year-end 2002 Sydbank's shareholders numbered almost 130,000 equal to a rise of more than 10,000 over the year. Nykredit, Fidelity Investments and Silchester International Investors Ltd. each own more than 10% of Sydbank's share capital and Topdanmark more than 5% Jan Feb Mar Apr May Jun Jul Share price developments 2002 The Sydbank share price was 490 at year-end against 430 at the beginning of the year and 310 at the beginning of Aug Sep Sydbank Bank index Oct Nov Dec 16

15 ORGANIZATION AND STAFF The Bank's personal customer relations are organized in 15 Danish regions, Sydbank in Germany, the Private Banking International departments, the SBK subsidiary undertakings and the expert functions at the Peberlyk head office in Aabenraa, including Sydbank Markets, Corporate Banking as well as National and International Payments. The Danish regions provide full service to all customers. Each region is organized in corporate client, investment banking, and retail customer sections. A d- ministrative tasks are predominantly carried out by customer secretariats in the regional head offices and supported by specialized head office depart ments. Sydbank in Germany Sydbank in Germany targets Danish corporate clients who trade with Germany as well as German corporate clients and retail customers. Moreover banking products have helped make Sydbank in Flensburg the specialist banker for retail customers commuting across the Danish-German border. Private Banking International Based on its documented investment advisory competence Sydbank has successfully provided investment and asset management to foreign, mainly German, clients through its Private Banking International branch in Gråsten for a number of years. As from February 2003 this activity has been enhanced through the establishment of a subsidiary bank, Sydbank (Schweiz) AG, in St. Gallen, Switzerland. These 2 branches have a staff of just over 30. SBK/DMK/Sydleasing/Sydfactoring These undertakings primarily engage in leasing (Sydleasing) and factoring (Sydfactoring), as well as the finance of yachts and DLP ad ministration. Sydbank Markets is divided into Trading, Asset Management & Advisory and Administration with staff totalling approximately 140 at the Peberlyk head office in Aabenraa, including approximately 50 in Administration. Staff At year-end 2002 Sydbank's staff totalled 1,945 (fulltime equivalent) compared to 1,897 at the beginning of the year. The increase is due to the acquisition of Egnsbank Fyn with a staff of just over 60. Total Group staff includes 44 junior bank clerks. The Bank proposes to recruit 25 new junior bank clerks and financial economists in IT Bankdata is Sydbank's primary IT supplier and acts as supplier to 15 other Danish financial institutions. The cooperation with Bankdata enables Sydbank to operate on the basis of an IT platform and IT products which are reliable and state-of-the-art. Parallel to operation, systems for eg treasury and securities trading, self-service and e-banking are being further developed as are the Bank's intranet and work-flow solutions. Regional Bankers' Association Sydbank is a member of the Regional Bankers' Association (RBF) together with Amagerbanken, Amtssparekassen Fyn, Jyske Bank and Spar Nord Bank. As of 1 January 2003 Arbejdernes Landsbank joined the Association, whose main object is to strengthen me m- bers' position in relation to sector policy, including infrastructure, which is currently undergoing significant changes. The Association's secretariat in Copenhagen coordinates the Association's work. Sydbank Markets Sydbank Markets manages the Bank's trading and customer oriented activities within securities and interest rate and foreign currency markets. Moreover Sydbank Markets is professionally responsible for the Bank's 16 decentralized investment centres and departments which employ a staff of approx imately

16 CORPORATE GOVERNANCE The Board of Directors of Sydbank has considered the Nørby Committee's recommendations on Corporate Governance. It is the opinion of the Board of Directors that the Bank to a large extent complies with the Nørby Committee's recommendations. Shareholders' role and interaction with Board of Directors and Executive Management Sydbank aims to remain an independent Danish allround bank deeply rooted in terms of customers and shareholders and to achieve over time financial results to the satisfaction of shareholders' long-term return expectations and exceeding the average of Danish banking peers. Sydbank's articles of association contain voting right limitations. It is the opinion of the Board of Directors that without conflicting with the Bank's long-term financial goals these voting right limitations support the Bank's aims of independence and business developments for the benefit of customers, local communities, shareholders and staff. Stakeholders' role and significance In accordance with the Committee's recommendations the Bank has formulated policies in relation to the most important stakeholders. These policies are accessible to the public. Openness and transparency The Bank complies with the Committee's recommendations on openness and transparency. Consequently the Bank operates in accordance with the stipulated general guidelines of the Copenhagen Stock Exchange on disclosure, as well as in accordance with the disclosure rules of information regarding listing in the Stock Exchange's MidCap+ segment. Sydbank has formulated in-house rules for compliance with these disclosure rules and has established an Investor Relation function as well as adopted a policy on the operation thereof. Moreover the Bank publishes quarterly financial statements. Board of Directors and Executive Management In all essential respects, the Nørby Committee's recommendations concerning the Board of Directors, eg regarding tasks and responsibility as well as independence and age limits, are observed. The Bank's Board of Directors comprises 14 members, 9 of whom are shareholder elected. The Board of Directors holds 11 ordinary meetings a year and also attends 2 annual local shareholders' committee meetings and 1 annual credit review. The Directors receive fixed annual remuneration. Executive Management members are employed on a contract basis and receive fixed remuneration. The shareholdings of the Board of Directors and the Executive Management are published quarterly. Risk management The Annual Report accounts for essential elements of the Bank's risk management. 18

17 MANAGEMENT REPORT Today the Board of Directors and the Executive Management have discussed and approved the 2002 Annual Report of Sydbank A/S. Sydbank's annual report has been prepared in compliance with the Danish Banking Act and the Executive Order on Bank Accounts and relevant accounting standards. Furthermore the annual report has been prepared in accordance with the requirements of the Copenhagen Stock Exchange in relation to the preparation of accounts of listed companies including Danish accounting standards to the extent that the Danish Banking Act and the Executive Order on Bank Accounts and accounting standards do not provide otherwise. We consider the accounting policies applied to be appropriate and the annual report gives a true and fair view of the Group's and the Parent Company's assets, liabilities, financial position and profit for the year. We propose that the annual report be submitted for adoption by the Annual General Meeting. Aabenraa, 17 February 2003 Executive Management Carsten Andersen Preben Lund Hansen Torben A. Nielsen (Chief Executive) Board of Directors Kresten Philipsen Christen Jessen Otto Christensen (Chairman) (Vice-Chairman) Vagn F. Christensen Tom Engsted Harry Max Friedrichsen Henrik Halberg Jytte Jensen Jørgen Rud Juul Jørgen sen Helmuth Kirsten Pernille Siesbye Anders Thoustrup Jan Uldahl-Jensen Margrethe Weber 19

18 AUDITORS' REPORTS SYDBANK'S INTERNAL AUDIT To the shareholders of Sydbank A/S We have audited the annual report of Sydbank A/S for the financial year of 1 January-31 December The Bank's Board of Directors and Executive Manage - ment are responsible for the annual report. Our responsibility is on the basis of our audit to express an opinion on the accounting information contained in the annual report. Basis of opinion We have conducted our audit on the basis of the Executive Order of the Danish Financial Supervisory Authority on the performance of the audit in financial institutions and financial groups and in accordance with Danish Auditing Standards. During the audit, based on an evaluation of materiality and risk, we assessed pr o- cedures, the accounting policies applied and estimates made and verified the basis for the amounts and other financial information disclosed in the annual report. In our view the audit provides a sufficient basis for our opinion. Our audit has not resulted in any qualifications. Opinion In our opinion, the annual report gives a true and fair view of the Group's and the Parent Company's assets, liabilities and financial position at 31 December 2002 and of the result of the Group's and the Parent Co m- pany's activities and of the Group's cash flows for the financial year of 1 January-31 December 2002 in accordance with the accounting provisions of Danish legislation. Aabenraa, 17 February 2003 Ole Kirkbak (Head of Internal Audit) AUDITORS ELECTED BY THE ANNUAL GENERAL MEETING To the shareholders of Sydbank A/S We have audited the annual report of Sydbank A/S for the financial year of 1 January-31 December The Bank's Board of Directors and Executive Manage - ment are responsible for the annual report. Our responsibility is on the basis of our audit to express an opinion on the accounting information contained in the annual report. Basis of opinion We have conducted our audit in accordance with Danish Auditing Standards. These standards require that we plan and conduct our audit for the purpose of obtaining a high degree of assurance that the financial information disclosed in the annual report is free from material misstatement. The audit has included sampling of information which supports the amounts stated in the annual report and other accounting information. The audit has moreover included an assessment of the accounting policies applied by the Board of Directors and Executive Management and of the significant accounting estimates made by the Board of Directors and Executive Management and of the overall presentation of the accounting information disclosed in the annual report. In our view the audit provides a sufficient basis for our opinion. Our audit has not resulted in any qualific ations. Opinion In our opinion, the annual report gives a true and fair view of the Group's and the Parent Company's assets, liabilities and financial position at 31 December 2002 and of the result of the Group's and the Parent Co m- pany's activities and of the Group's cash flows for the financial year of 1 January-31 December 2002 in accordance with the accounting provisions of Danish legislation. Aabenraa, 17 February 2003 KPMG C. Jespersen Sven Jørgensen (State Authorized Public Accountant) H. Martinsen Statsautoriseret Revisionsaktieselskab Svend Aage Nissen (State Authorized Public Accountant) 20

19 ACCOUNTING POLICIES Basis of preparation The Annual Report of Sydbank has been prepared in accordance with the Danish Banking Act, the Executive Order on Bank Accounts and accounting standards issued by the Danish Financial Supervisory Authority. Furthermore the annual report has been prepared in accordance with the Copenhagen Stock Exchange guidelines for disclosure of information by issuers of listed companies, including Danish accounting standards to the extent that the Danish Banking Act, the Executive Order on Bank Accounts and accounting standards issued by the Danish Financial Supervisory Authority do not pr ovide otherwise. The accounting policies applied in the preparation of the 2002 Annual Report are consistent with those adopted in the preceding year. The merger with Egnsbank Fyn as at 1 January 2002 has been accounted for as an acquisition. Comparative figures for previous years have not been restated. Goodwill in connection with the acquisition has been written off directly against shareholders' equity (tier 1). Consolidated accounts The consolidated accounts comprise the annual accounts of the parent company and its subsidiary undertakings. Undertakings of a temporary nature in settlement of non-performing loans etc or with a view to participating in restructuring are not consolidated. The Group structure (p 26) lists the consolidated undertakings. All consolidated accounts have been prepared in accordance with the Group's accounting policies. The consolidated accounts integrate the income, expense, assets and liabilities of the consolidated undertakings. The book value of the consolidated undertakings' holdings in subsidiary undertakings is eliminated against the subsidiary undertakings' shareholders' equity. In addition intragroup balances, income and expense are eliminated. Essential accounting and valuation policies Basis of preparation With the exception of a number of fees which are taken to the profit and loss account at maturity, income and expense are accrued. Interest income from nonperforming loans etc is not recognized as income. Core income Core income is defined as income before costs excl investment portfolio earnings. Core income comprises core income excl trading income and trading income. Trading income derives from trading in instruments based on interest rates, shares and foreign currency as well as profit/loss of the related trading portfolio. Trading income also comprises asset management and advisory services, including commission and fees from Danish investment funds and the Bank's pooled schemes and custody fees. Core earnings Core earnings represent total core income less costs and provisions relating to core income. Profit from investment portfolios Investment portfolio earnings derive from the portfolios of shares, bonds, derivative financial instruments and holdings in non-consolidated undertakings managed by the Group's Treasury Division. Investment portfolio earnings are less funding charges and costs. Amounts owed, loans/advances and guarantees Amounts owed by credit institutions etc, loans and advances and guarantees are subject to continuous examination and critical evaluation with a view to identifying a potential risk of loss. The necessary amounts have been charged to the profit and loss account either as realized losses or as loss provisions. Provisions are transferred from the provisions account and a loss is written off when it is considered realized. Provisions for bad and doubtful debts have been set off against the underlying assets. Intragroup transactions Intragroup transactions are subject to market terms or settlement at cost. 21

20 Lease assets Group lease assets are finance leases and are included in the balance sheet under "Loans and advances". Lease assets are valued at cost less depr e- ciation according to an annuity method and according to the useful lives of the individual assets, ie cost less any estimated residual value is written off over the lease term. Lease rentals received less the year's instalments are disclosed under "Interest income". Fixed asset investments Fixed asset investments include shares in associated and group undertakings, other significant holdings, shares in undertakings jointly owned by the Group and other banks etc as defined by the Executive Order on Bank Accounts, as well as shares acquired in connection with formal cooperation agreements concluded with other financial institutions. Holdings in group and associated undertakings are included in the accounts of the parent undertakings using the equity method. Shares in Sydbank are included at market price at year-end. Shares in Foreningen Bankdata are included using the equity method. Other fixed asset investments are included at the lower of cost or estimated value, however not exceeding the book value. Current asset investments Listed securities are included at market price at yearend. Bonds scheduled for redemption on 2 January 2003 are valued at par. Bonds scheduled for redemption at later dates are stated at prices based on yield and term to maturity. Unlisted securities are included at the lower of cost or estimated value, however not exceeding the book value. Fixed rate amounts owed are written down so that, as a minimum, the return corresponds to the market interest rates of similar amounts owed at year-end. Fixed rate amounts payable whose interest rate risks have been hedged by derivative financial instruments are not subject to market value adjust ment. Repurchase agreements/ reverse repurchase agreements Securities sold under agreements to repurchase the same at a fixed price at a later date (repos) remain in the balance sheet. Amounts received are stated as amounts owed to the transferee. Such securities carry interest and are revalued, and the profit or loss is stated in the profit and loss account as if the securities were still in the Bank's por tfolio. Securities purchased under agreements to resell the same at a fixed price at a later date (reverse repos) are not stated in the balance sheet and any related profit or loss is not stated in the profit and loss account. Amounts paid are stated as amounts owed and carry interest as agreed. Derivative financial instruments Derivative financial instruments comprise outstanding forward transactions and futures, interest rate and currency swaps, Forward Rate Agreements (FRAs) as well as interest rate and currency options etc. Derivative financial instruments are included at market value at year-end. Market value adjustments are included in the profit and loss account. Interest on forward transactions based on securities and foreign currency as well as on interest rate and currency swaps is included as a net figure in the profit and loss account. Derivative financial instruments held for the purpose of hedging the interest rate risk of certain fixed rate assets and liabilities are not subject to market value adjustment. 22